We were in favor of the previous reduction and did a similar analysis in the lead up to the reduction from last month, which can be read here.
The one nuance I would add is that not all LPs are getting the highest advertised rate (28% as of today of which 24% is SWISE rewards). You’re only getting this if you are LPing in the most optimal reward range which is the smallest range around current tick price, and mostly SETH2 liquidity. Last month, the most lucrative range was mostly ETH liquidity, but since price has improved those older positions are out of range and most LPs have updated their ranges to reflect this.
However, plenty of LPs are getting lower effective APR on wider ranges, and a well-distributed set of liquidity should be one of the goals of the program. SETH2 price won’t be aided by having a huge amount of liquidity concentrated on a tiny range, even though this is what will give the high APR.
Once you move out of the tightest range, APRs drop quite dramatically, about half to 14% if you LP over two ticks, and decreasing by half for every additional tick you add to the range width.
Because of this, I would be cautious about reducing rewards by half again since this would those wider range positions have APR under 7%.
Is there some further analysis that can be done on the average APR that LPs are getting based on the full set of different ranges that people are LPing with? I think this would go a long way to getting some better data to help drive the conversation and set incentives. If we see that the effective total for the pool really is as high as 20%, then a larger reduction in emissions could be warranted. Without doing a full analysis, I think that most LPs are getting something quite a bit less than the 28% max-possible yield, so it may make sense to be more conservative on the emissions reduction.
I also agree with the points above that the next two months in to the merge could be quite volatile for the ETH market and for liquid staking derivatives, so it may be best to wait until after the merge (mid to late September unless there are issues with Goreli/Prater merge this week. That’s only a month or two of higher emissions, but it could help continue to support the SETH2 peg and also keep LPs incentivized to stay in positions through any merge volatility. Once the merge is off then staking dynamics could change drastically as well (staked yields up, liquid staking derivatives price up, liquid staking derivative token price up, etc.) and then we can reevaluate a further reduction.